Why the Federal Flood Insurance Program Is $24.6 Billion Under Water

MOST POPULAR

“Exceptional opportunity to own this oceanfront 5-bedroom home in one of the most exciting new coastal communities. Beautiful sandy beaches, panoramic water views overlooking Hook Pond and breathtaking vistas from every angle. Move-in condition!”

As the nation faces growing challenges of powerful storms and widespread flooding fueled by climate change and overbuilding on water view property, the federal government has incurred massive debt providing Americans with low-cost flood insurance.

Congress created the National Flood Insurance Program (NFIP) in 1968 to address the mounting costs of federal disaster assistance from flood damage and to make flood insurance more affordable for homeowners and small businesses in more than 22,000 flood-prone communities across the country.

The program essentially transferred the financial burden of flood risk from property owners to the federal government by offering policies with premiums well below market levels.

Despite repeated efforts to contain the cost of disaster response and encourage individuals and businesses to build outside of flood plains, government-subsidized insurance premiums haven’t kept up with the government’s risks.

As a result, the Federal Emergency Management Administration (FEMA) – the manager of the program – has gone deeper and deeper into debt. Since 1996, federal debt incurred by the flood insurance program has increased 16-fold and has directly added to the national debt.

As of last month, FEMA owed the Treasury $24.6 billion for money borrowed to pay claims that exceeded premiums collected, a new report by the Government Accountability Office (GAO) states. Those funds include $1.6 billion that FEMA borrowed following a series of floods in 2016.

“FEMA is unlikely to collect enough in premiums to repay this debt,” GAO said in its report, the most recent in a series of critical reviews. “Eliminating the debt could reduce the need to raise rates to pay interest and principal on existing debt.”

Even if FEMA were to succeed in scaling back part of its debt by boosting premiums on homeowners and businesses, additional premiums still would be needed to reduce the likelihood of future borrowing, GAO says. And raising premium rates could also create “affordability issues for some property owners,” discouraging them from purchasing flood insurance that they may need.

Controversy over federal flood insurance has festered for years. Many of the tens of millions of families and businesses located in coastal areas or in vulnerable flood zones have looked to FEMA to respond to natural disasters and assist them in purchasing flood insurance in advance of the next disaster. The program was created after lawmakers concluded that private companies couldn’t profitably provide coverage at a price that consumers could afford.

But critics complain that the flood insurance program has gotten out of hand financially and that too often the government has subsidized the coverage of wealthy Americans or people who insist on building in areas prone to flooding.

About 25 million people live in an area vulnerable to coastal flooding, while millions more live along inland waterways that also pose risks.

A report by the Environmental Protection Agency (EPA) during the Obama administration claims the impact of climate change is likely to worsen existing problems frequent flooding.

“Confronting existing challenges that affect man-made infrastructure and coastal ecosystems, such as shoreline erosion, coastal flooding, and water pollution, is already a concern in many areas,” the report stated.

Congress originally authorized a borrowing limit of $1 billion for the flood insurance program and then increased it to $1.5 billion in 1996. However, following three catastrophic hurricanes in 2005, including Hurricane Katrina on the Gulf Coast, Congress amended FEMA’s borrowing authority three more times to more than $20 billion. Then, after Superstorm Sandy in 2012, FEMA’s borrowing authority was boosted to $30.4 billion.

Alarmed by the program’s growing debt, Congress in 2012 passed the Biggert-Waters Flood Insurance Reform Act, putting the NFIP on a more solid financial footing by phasing in insurance rate increases to reflect actual risk for some of the most heavily subsidized properties. Yet only two years later, Congress repealed many of the provisions in response to complaints from policyholders about rising premium costs.

The flood insurance program is up for reauthorization this year, and the GAO is urging Congress to address the insurance programs fiscal crisis – changes that could mean higher insurance premiums for many Americans if approved.

Based on discussions with stakeholders and previous research, GAO says, “reducing federal exposure and improving resilience to flooding will require comprehensive reform” of the flood insurance program in a half-dozen key areas. Among the watchdog agency’s recommendations:

Raise the premiums -- The flood insurance program’s premiums do not reflect the full risk of loss, which in turn increases the federal government’s fiscal exposure and discourages private insurers from selling flood insurance. By raising the rates, the government would also improve policyholders’ understanding of flood risk and encourage private-sector involvement.

Means-test assistance – While raising premiums would put a strain on many consumers, efforts to assist them should involve direct subsidy payments rather than discount premiums, and the assistance should be means-tested so that wealthier residents and businessmen do not receive the benefit. GAO said that many stakeholders believe the government should focus more on helping to pay for mitigation – such as elevating buildings – to permanently reduce the flood risks.

Force consumers to buy coverage -- Many people don’t purchase insurance because they misperceive or downplay their flood risks. That’s especially true of people who live outside the highest-risk areas, who are not required to buy flood insurance and therefore don’t worry about their potential vulnerability to flooding.

Washington Editor and D.C. Bureau Chief Eric Pianin is a veteran journalist who has covered the federal government, congressional budget and tax issues, and national politics. He spent over 25 years at The Washington Post.